I wrote a blog a few days ago discussing the concern about the effect of the Basel III agreements on capital reserve limits and the possible effects on lending. Various economists including the Heartland Institute’s Economic Advisor Jim Johnston warned that the increased capital reserve requirements could lead to a contraction in lending. Johnston compared these efforts to similar efforts in the 1930′s, which failed miserably.
FDIC Chairman Sheila Bair argued in a recent speech that the Basel III agreements are not only necessary, but that banks will be able to increase their capital reserves without greatly effecting lending. Jacob Gaffney, the editor of HousingWire wrote about Bair’s speech in a recent article:
“In a speech Monday before the Risk Management Association in Baltimore, FDIC Chairman Sheila Bair said she is confident any costs associated with implementing the new capital requirements under Basel 3 can be absorbed by the financial institution itself.
Furthermore, Bair said the recession is now impacting the ability of governments to effectively issue bonds.
‘For many U.S. consumers and businesses, credit dried up in the financial crisis when securitization markets shut down, financial institutions tightened standards, and the value of real estate collateral declined,’ she said. ‘Governments, too, now face heightened scrutiny of their creditworthiness due to the effects of the recession on their balance sheets.’”
While increased reserves are a sound method of minimizing a credit freeze, the choice should lie with individual banks. If banks feel that increasing their capital reserves fits their best business interests and they are fiscally capable of reserving the cash, they will do so. This has been proven time again, banks become more conservative after a crash and move to recapitalize and curb lending, a fact which some banks were criticized for after the housing crash.
